Of the thousands of cases appealed to the U.S. Supreme Court each year, only 75 to 80 are actually heard by the Court. Of those cases, only a select few get the attention of the media. Below is a summary of the three important decisions hand down by the Court in 2015 that could affect how you are taxed, pay for healthcare and plan your estate.
Comptroller v. Wynne – A State Can’t Double Tax Income Earned Outside of the State
Legal Issue: Does Maryland’s state income tax structure violate the U.S. Constitution by “double taxing” a resident’s income earned from economic activity in a different state which taxes the same income?
Decision, 5 – 4: The Supreme Court delivered a taxpayer-friendly ruling which states that Maryland’s “double taxation” arrangement violates the dormant Commerce Clause.
The Wynne case concerned a Maryland couple who owned stock in a Maryland S Corporation that did business in nearly 40 states. Income in an S Corporation is passed through to its shareholders. The Wynnes paid income taxes in Maryland as well as their pro-rata share of taxes on the income the corporation earned in the other states.
Residents of Maryland are subject to state income tax and a “local tax” established by the city or county in which they live. Before the Wynne case, the state permitted residents to take a credit against the Maryland state tax to offset a comparable tax paid to another state, but it did not allow a credit to be taken against the local tax. Therefore, income of a Maryland resident earned from another state was “double-taxed” by being subject to both the out-of-state tax as well as the local city or county tax. The Court struck down the “double taxation” structure by ruling that the dormant Commerce Clause allows Congress to regulate interstate commerce. Therefore, Maryland could not restrict interstate commerce by offering a credit against state income taxes but not against local income taxes.
Planning Tip: The Wynne decision will conceivably affect hundreds of cities, counties and states other than Maryland, including New York, Indiana, and Pennsylvania. If you pay income taxes in your home state as well as other states, you should seek qualified tax advice regarding filing protective claims (such as amended returns or requests for refunds) for tax years in which the statute of limitations has not run. Luckily for those of us in South Dakota we do not need to worry about state income taxes.
King v. Burrell – Obamacare Subsidies Are Available to All
Legal Issue: Can the IRS provide tax-credit subsidies to healthcare coverage purchased through the federal healthcare exchange under the Patient Protection and Affordable Care Act (the “ACA,” commonly referred to as “Obamacare”)?
Decision, 6 – 3: The Court ruled that Obamacare subsidies are obtainable for individuals who acquire their healthcare coverage through a federal exchange.
Contained in the 2,700-page ACA is a provision which says that tax-credit subsidies are available to individuals who get healthcare coverage “through an exchange established by the state.” Subsequent to the ACA being passed, 34 states did not establish exchanges. Therefore, the residents of those states had no other option than to use the federal exchange to obtain their health care coverage. The King case challenged the legitimacy of federal subsidies allowed to the residents of those states because the ACA appeared to limit subsidies to individuals used a state-established exchange. Chief Justice John Roberts wrote for the majority and stated that “We doubt that is what Congress meant to do.” Therefore, the validity of subsidies claimed by residents of the 34 states that use the federal healthcare exchange was upheld.
Planning Tip: The King decision will not end the Obamacare debate. In fact, as the 2016 presidential election nears it will likely be hashed out in the political arena.
Obergefell v. Hodges – Same Sex Marriage is Legal Everywhere in the United States
Legal Issue: Is it a violation of due process principles applied to the states by the Fourteenth Amendment of the U.S. Constitution for a state to fail to recognize same sex marriages legally licensed in other states?
Decision, 5 – 4: Yes, same sex marriages are legal and must be recognized everywhere in the United States.
The Obergefell case combined four cases that challenged state-banned same sex marriages in Michigan, Ohio, Kentucky and Tennessee. The Court ruled that marriage is a fundamental liberty and denying the right of same sex couples to marry would violate the Due Process and Equal Protection Clauses of the Fourteenth Amendment.
Planning Tip: Same sex couples who are considering getting married should decide if commitments regarding handling debt, money and related matters should be formalized in a prenuptial agreement. Same sex couples who are already married need to review their estate planning documents and prenuptial agreement need to be changed in view of the King decision.
The Bottom Line on the Wynne, King and Obergefell Decisions
There are continuous changes in the law from legislative, regulatory and judicial action. The examples listed above from the recent Supreme Court session are just a small example of the many changes that occur every year. How these cases will affect your planning decisions remains to be seen. I am available to answer your questions about the Wynne, King and Obergefell decisions could affect you and your family.